Why are Agricultural Goods Not Traded More Intensively: High Trade Costs or Low Productivity Variation?

Abstract

This paper empirically studies the sizes of agricultural trade costs and productivity variation in the agriculture sector. In a general Ricardian trade model, I identify these two factors as possible causes of the observed low trade intensity of agricultural goods. Using data on bilateral trade flows, prices of agricultural goods, and sectoral production from a sample of 46 countries, I estimate the variation of agricultural productivity as well as trade costs on agricultural and manufactured goods. I find that trade costs are substantial, with agricultural trade costs roughly twice as large as manufacturing trade costs. Moreover, consistent with the existing literature, I find that distance is the dominant part in the estimated trade costs. Lastly, relative to existing estimates of the heterogeneity of manufacturing productivity, the heterogeneity of agricultural productivity is large. These findings suggest that high trade costs are the main impediments to agricultural trade and that there exist large unrealized gains from trading agricultural goods.